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November 12, 2010

How to read Richard Lambert's big speech on universities and business

What follows is an annotated version of the speech given by Richard Lambert on Browne and the Comprehensive Spending Review today. My annotations are shown in red.

The director-general of the Confederation of British Industry gets top marks from me for tackling both issues together. In the end, both bits of policy are just ways of talking about universities. Let's see how compelling his analysis is...

I‟d like to discuss how the combination of Lord Browne‟s report on university funding and the outcome of the Spending Review will shape the way that businesses and universities are likely to work together in the future.One way or another, the impact is going to be big.

Quite so.

I begin by stressing that these are preliminary thoughts, intended to open up debate. They are not based on discussions with the universities and businesses in CBI membership – that will come later. But it would be odd to have a conversation with a group like this and not raise some of the questions that are at the front of all our minds.Radical reforms in England‟s higher education system are on the way, of a kind that will be felt by all its stakeholders, including the business community.The starting point is what promises to be a series of fundamental changes in the funding and direction of England‟s higher education system – a shift from a supply side model in which university teaching is largely financed by public funds to a demand side approach, in which private funding plays a much bigger part and student choice largely determines the courses that the university offers.In Lord Browne‟s words, “institutions will no longer be paid just for being there.” If their faculties don‟t succeed in attracting students, they will eventually have to close.The vision, again in his language, is that “instead of receiving most of their money through a block grant for teaching, we have proposed that funding must instead follow the student through government loans. …It will be up to the student to decide whether a particular course represents good value for their investment. The result will be a system in which institutions compete more rigorously for students, driving quality throughout the sector while ensuring that prices do not increase out of sight.”

This is a fair-ish reflection of what's in Browne. But that was tendentious to start with, and it's looking less and less like what the government is going to deliver.

The supply-to-demand-switch is less clear cut than suggested. In the first place, a university that can't attract students now will lose its funding and soon go out of business. Browne's rhetoric of being paid "just for being there" was over the top. And even in a market system, universities will still decide what courses to offer and students will have to choose between them, as now.

Similarly, the claim that the new system will improve quality throughout the sector is just an assertion. And even in its own terms, it depends on the creation of a market in higher education. This is looking less and less likely. Not only are fees going to be capped at £9,000 but in order to stop all universities lurching up to that level with all courses, the government may well have to impose more intrusive controls. And of course at the other end, the Treasury will be controlling how many students are allowed to have the loans that let them into the market.

Whatever the strengths or weaknesses of Lord Browne‟s argument, it has had one immediate attraction for the coalition government. By shifting most of the cost of teaching students from the taxpayer to the graduate, it paved the way for massive cuts in government spending on higher education in the Spending Review. Excluding research funding, the overall resource budget for HE will fall from £7.1bn to £4.2bn – a cut of two fifths – by 2014-15. In very rough terms, this gap will be plugged by the increases in graduate contributions that are now being proposed.

I am surprised that Lambert has accepted the government's presentation of this at face value. In reality, what is the difference between the Government Debt Office selling gilts to finance departmental spending and selling gilts to finance student debt? Both are going to have to be repaid ultimately by the collection of taxes. Indeed, it is a central claim of ministers that the loans students take out is not a form of personal debt but an obligation in future to pay higher tax! If it were ever to come to a doomsday reckoning of HMG's creditworthiness, the bond markets are not going to see any meaningful difference between the two different reasons that lay behind the GDO's selling of indistinguishable gilts.

The debate so far has very properly focused on the likely consequences for those who will be most affected by such a change – the students and their families, and of course the universities themselves.But the impact on businesses – both as employers and as research partners – will also be significant. I will group the possibilities under six broad headings.The first is that in this brave new world, universities will teach what their customers – the students – want them to teach, a change that will have real consequences for their future employers. The implication of the Browne review is that the teaching subsidy from the taxpayer will be slashed from £3.9bn to £700 million, which will be used to support courses that are costly to teach and deemed to be strategically important, such as medicine and science.

Big point. The idea that universities will give students what they want is flawed. This is not for the reason given by Stefan Collini - that they are young and naive. "Student" here really means student + parents + relatives + friends + teachers + careers advisors. It is because a) there's not much in the way of overcapacity and it will take years (if ever) for new entrants to dent the market; and b) universities are already far more commercial than they are given credit for. They have marketing departments that are very successful in the global competition for overseas students. These marketing departments will if necessary be expanded and focused on the UK market. And they will sell what universities want students to buy - low-cost, high-margin courses.

Small point. Given the demand, and the pay off in securely higher income, I really can't see the case for subsidising medical teaching, however expensive it might be. There isn't going to be a shortage of students at any price.

One big question is about how young people will choose which course to study in a world where a three-year degree on the maximum fee permitted by the government could bring with it a deferred liability for the graduate of up to £27,000 – not something to be taken on lightly.Browne suggests that value for this money will be in good measure determined by students in terms of “the employment returns from their courses” – in other words, the more they are likely to earn tomorrow, the greater the liability they will be prepared to take on today.But as he recognises, to make informed choices students will have to have access to much higher quality information, advice and guidance than is now available. Among other things, they will need to know a lot more about the potential employment outcomes – the kinds of jobs and the salaries that will come with success in a particular course at a particular university.Schools and universities will have a lot of work to do here, but so – surely – will business. In a demand-led system, employers are going to have to get much better at articulating their future needs and spelling out potential career prospects. Unless they are set on a particular vocation, most young people won‟t have a clue about the world that might be waiting for them in half a dozen years‟ time – they will need all the help and guidance they can get.Although some employers already do a good job in this respect, there‟s a lot of ground to be made up here. For example, there‟s a killer chart in the latest Higher Education-Business and Community Interaction Survey, showing the degree of engagement between sector skills councils and universities. Only two had touched more than 50 per cent of HEIs. Seven had only been engaged with roughly 10 per cent or less.That is not a very impressive picture and one which will have to change.So the first big implication of the changes is that businesses are going to have to do much more to work with young people while they are still at school to explain their career choices, and to set out what a particular course of study might lead to.

A very constructive point. But is there any hope of this happening any time soon? Indeed, is it a realistic prospect ever? Possibly for the CBI's members. But not for the employers employing most workers in Britain.

The second follows from the first, and it‟s this.The way things work today, many businesses do little more than wait at the end of the conveyor belt for students to drop off into their employment at or close to the end of their studies. This, too, is going to have to change.In this new world, it will make sense for companies to get engaged with potential future employees at a much earlier stage in their university studies – perhaps supporting those they need most with bursaries, or other forms of sponsorship, and providing work experience along the way. It may be time for a revival of the much-lamented sandwich course.To meet their future skills needs in a demand-led system, companies are going to have to do more at an earlier stage to persuade students that they have something attractive to offer.Otherwise their competitors will.The good news is that all the evidence suggests this kind of engagement is of real benefit to both parties – to the students, who get a much better understanding of the world of work, and to the employer, who can spot and encourage talent at an early stage.Studies show that graduates who have had a decent spell of work experience are likely to be significantly better paid and much less likely to be unemployed than those who haven‟t. And this will be all the more important when they are carrying the burden of much larger loan repayment liabilities.

Yes, that would be good.

Businesses will also have to rethink their relationships with universities, as well as with students, and this is big implication number three.A lot of companies still take the view that they pay for higher education through their business taxes, and their responsibilities end there. They believe that it‟s up to the university to produce graduates that are employable, and that their interest only starts at that point.This view is also going to have to change in a demand-led world, where graduates, rather than the taxpayer, are going to be largely responsible for financing university teaching. If they want a particular set of skills, companies may well find it makes sense to work with particular institutions to provide them.This is already beginning to happen.A particularly interesting recent example is the five-year collaboration announced this autumn between HP, the leading high-tech company, and the University of the West of England. This agreement will lead to a four-year degree programme, provisionally called the UWE HP Enterprise Computing Degree, which will involve internships as part of the course. Graduates will emerge as certified professionals as well as with their degree, and HP itself will participate in the development of degree courses, ensuring that graduates come out with the skills that are important to its business.It would surely make sense for other major employers of graduates to look carefully at this kind of approach, which ought to ensure a stream of consistent and relevant talent for the future.Universities themselves are more likely to be open to this kind of partnership in the new world than they were in the past, when they tended to regard outside interference in shaping the curriculum with a degree of suspicion.The reason is that the old world was one where university management structures and systems had been shaped in good measure by the rules and mechanics of public funding.As PA Consulting has explained in a fascinating analysis, “Institutions‟ strategic planning, management information, financial controls and performance systems are similarly geared to the public policy and funding regime, which they have come to regards as synonymous with their external market. Even the organisation of academic activities is shaped by funding rules…”The introduction of market forces as proposed by Browne and endorsed by the coalition will change that model significantly. Among other things, universities will need to build a self-sustaining business portfolio, to generate annual surpluses, and be measured by value and cost effectiveness as well as the intellectual quality of what they have to offer.

Interesting points. But is the Treasury actually going to pump enough money into the system to enable more universities to generate bigger annual surpluses? I thought they wanted academic salaries to be squeezed down.

PA Consulting describes this as a “capability-led model” which it sees as the best way of weaning the system from its dependence on the levels and current priorities of government funding.All these trends will change the way universities interact with students and businesses. Different institutions will have very different objectives, and all will need fiercely to protect their intellectual integrity. But just as they have become much more open to research collaboration with business over the past 20 years, my guess is that they will be more willing to contemplate properly managed teaching partnerships in the years ahead.Partnerships with business will also help universities achieve one of the main obligations under the new regime, which is to attract students with less-privileged backgrounds. Working with employers through, for example, professional development, outreach, and high-level apprenticeships will be an important way of achieving this goal.

I'd like to see more detail on this. Why do we think people working at BP or Tesco who the company sends to university part-time will be any more diverse than the current student population?

As the CIHE‟s David Docherty has written, the big question post Browne is: “How do businesses and universities partner more inventively in the interests of the country and develop high-quality graduates who have learned how to innovate?”Research collaboration is itself a fourth area where relationships between business and universities seem set to change – not as radically as on the teaching side, perhaps, but still with significant implications for quite a number of companies.The spending review has ring fenced the science budget in money terms, a matter of enormous relief to the research intensive universities even though their funding in real terms will be squeezed as inflation kicks in over the next few years. But this does not add up to the prospect of business as usual.In particular, Vince Cable, the Secretary of State for Business, has made it clear that he thinks a further concentration in research funding would be desirable, so as to give maximum support to world class work wherever it is to be found. Other policy changes – for example, the abolition of the Regional Development Authorities – are likely to reinforce the tendency for research funding to be concentrated in the hands of fewer institutions. The trend in the longer term may be towards a clearer distinction between research intensive institutions and teaching only universities – colleges that do very little in the way of research.

This is confused, because it doesn't take into account granularity. Cable has not talked about concentrating research on fewer institutions. He has hinted at abandoning 2* funding. David Willetts has explicitly favoured departmental granularity over institutional granularity. Of course, abandoning 2* funding would hit some institutions harder than others, mainly the new entrants to research in the former polys. But very few universities would lose all their money. And we know it is research that earns a university prestige, which is what attracts students and persuades them to pay high fees. So there are powerful reasons why the existing institutions will not want to give up research.

Big companies may not be too concerned about this prospect. They know their way around the university landscape, and location isn‟t so important – they are prepared to travel to find the best research brains.But it may be a different story for smaller firms. Distance matters more to them, and they are more likely to be interested in the kind of applied research which is near to the market, rather than the ground-breaking stuff which is being undertaken by the research intensive institutions. It‟s these local partnerships that could be at risk in the new scheme of things.

I agree entirely. Willetts was talking about absorptive capacity a while back, which I think is a sensible approach. But the RAE/REF only indirectly supports this. If you fund the best research, you may stop funding important expertise and end up still destroying much of universities' contribution to the UK's absorptive capacity. (Though I should say that Nick Petford, the Northampton VC, said at our conference last week that they'd be fine without QR and would continue to grow its hi-tech consulting.)

Every university I know would also hate to see its research activities wither for lack of funding: excellent teaching is built on excellent research, they say – and besides the research intensive universities will get fat and lazy if they are not subject to competition from the little guys.So this is another area where it‟s going to be important for business to develop a view.Just as Mr Cable has made it clear that he is in favour of more research concentration, so he believes there should be much less of a dividing line than there is today between further education and higher education. This is the fifth area where business needs to be ready for change.In Mr Cable‟s words, “By breaking down the value distinction between the social and economic missions of research and teaching institutions, we can also finally ditch the anachronistic distinctions of status and value between further and higher education.”He goes on: “The reality is that our best FE colleges and advance apprenticeships are delivering vocational education every bit as valuable for their students and the wider economy as the programmes provided by universities.”

The cynic in me says, "Yeah - and it's much cheaper, too."

It seems likely that the combination of Browne and the Spending Review will further blur these distinctions in the years ahead.

That I think misses the political point. Cable wants to blur the distinctions.

We can all think of universities which don‟t do much in the way of research today, and may have to do less tomorrow; which are heavily dependent on government support for teaching; and which may not have the brand strength that will be required to whack through higher fees.How might they respond to such a combination of pressures? One answer might be to pool their efforts more closely with the FE colleges in their region, working together on foundation degrees, developing special courses for businesses in the region, and making the future employability of their students their overriding objective. If businesses were prepared to support and engage with such institutions, the outcome could be positive for all concerned.

I like that. As a student, if I really believed my employability was reliably going through the roof, I'd like that.

And so on to my sixth and perhaps most important question for business in this changed environment.It‟s this. What do we think universities are for?There are obvious risks to business, as well as to society more broadly, in a utilitarian approach to funding that largely limits government subsidies for teaching to the sciences and healthcare, and which leaves decisions about what courses are to be taught mainly in the hands of students. These risks are compounded by the fact that government funding for higher education in England is already at the bottom end of the OECD averages and is now heading sharply lower.Now you wouldn‟t expect the CBI to start complaining about the introduction of market forces, or the decision to focus on building up badly-needed strengths in science, technology, engineering and maths. Nor will I. But I can‟t help feeling uneasy about lasting changes that are being driven through at least in part in response to the fiscal crisis, and which to me have a distinctly utilitarian feeling to them.Such an approach would raise big questions about the sort of society we want to become. But it could also have unexpected consequences for business.For one thing, it‟s impossible to predict what disciplines will be of most economic and social value in a rapidly changing world.

This is why it's important to retain deep intellectual roots far from the market across all disciplines - the roots provide flexibility, allowing the country to rapidly develop branches of expertise that emerge as economically important.

Let me give you just a couple of examples. A senior executive at Intel, the computer chipmaker, has the title of director of interaction and experience research – and she has a PhD in cultural anthropology. What‟s especially interesting about this is that the company itself doesn‟t sell direct to consumers, so she‟s not second guessing how the average punter might react to a whizzy new product. Instead, it‟s her job to help the company develop new devices, make new software, and enter new markets by providing its technologists with a better understanding of how people all over the world use computers, phones and other gadgets.It‟s noteworthy that other successful tech companies, like Microsoft, IBM and HP, also have anthropologists, ethnologists, and other social scientists working alongside the techies in their development labs.In other words, STEM isn‟t everything. Most of the big breakthroughs in the development of products and services these days come from collaboration among different disciplines. Philosophers working alongside software engineers. Biochemists working with mathematicians and ethics graduates.A second example of the same thing is to be found in the Fuse, a really excellent publication by the CIHE which is subtitled: Igniting high growth for creative, digital and information technology industries in the UK.For me, this report has three clear messages. One is that it is dealing with a substantial and high growth area of economic activity, and one where the UK has real competitive advantage. This country is the largest producer of TV and radio content in Europe, has the third-largest filmed entertainment in the world, has the largest publishing industry in Europe, and a cohort of writers and illustrators and games makers who are among the most successful in the world. The list goes on.The second message is that the government has a vital role to play in creating the environment in which businesses of this kind can flourish.And the third and in this context most important message is that successful creative industries require a lot of different skills – content creation, design, an understanding of the media, the arts and much more. Universities should be incentivised to support study in these areas, it argues.

Well now we run into some quite fundamental problems. This is veering towards manpower planning, albeit in gentle fashion. This just can't be effectively reconciled with a market in HE.

This is another case where too narrow a focus in higher education teaching is not in the interests of business.I believe the same message applies in research. And I‟m pleased to have this prejudice confirmed by a second excellent publication from the CIHE – Supporting Research Excellence, which was signed off by the research leaders of some of our most successful companies.What was striking for me about this paper was the emphasis that its authors place on the importance of curiosity-driven research at higher education institutions.Of course, the companies concerned value the economic impact of research they can build on. But, they say, “We would also be concerned if, as a consequence of measuring such impacts, researchers investigate only those areas for which they can see a clear route to market. This would undermine what we truly value in our relationships with universities, which are novel ideas, thinking at „right angles‟ to our R&D staff. And developing expertise from addressing and overcoming new problems.”After all, as they say, we have many examples of discoveries from the 1980s whose full potential is only becoming apparent today.So this is another case where business does not favour a strictly utilitarian approach.Then comes the potential impact of market forces. We must believe that they will drive up quality, and put the third rate out of business.But there may be less obvious and favourable consequences that businesses will have to think about. For example, the current system permits universities to cross subsidise courses which may be expensive to teach or relatively unpopular with students, but are important to employers.David Willetts, the university minister, tells a good story about the economics department in one of our great universities. As a class project, the students calculated how much money their fees and teaching subsidies were bringing into the university, and how much their course was actually costing the university to deliver. There was a big gap between the two.In response to their question about where all the money had gone, they were directed to look out of the window at the shiny new physics block that was going up across the way.Such cross subsidies could become harder to sustain in a more competitive market place. It may also become harder to justify the high price of postgraduate work and the hefty fees paid by foreign students in a more transparent environment.Maybe all this would be a good thing. But it would certainly require a very different approach to financial and course management.My guess is that a fair number of universities will choose to remain comprehensive, teaching a wide range of disciplines with the resultant need for continued cross-subsidisation. But others won‟t be able to justify a viable level of fees for the arts and humanities, and will focus instead on teaching business and accounting – where they are likely to find themselves facing increasing competition from low-cost providers in the private sector.

Everyone keeps saying this. But arts and humanities courses are cheap to deliver. If you've got the brand, you can make a lot of money on them.

Tough times, indeed.There is also a question about how well placed students are to determine what they should study. In a scathing attack on Browne in the London Review of Books, Cambridge academic Stefan Collini writes “it may be that the most appropriate way to decide whether the atmosphere in the student bar is right is by what students say when asked in a questionnaire whether they „like‟ it or not. But this is obviously not the best way to decide whether a philosophy degree should have a compulsory course on Kant.”The fact is, though, that most employers are less interested in the precise details of what graduates have studied than in what the experience has taught them.Vince Cable put this very well in a recent speech. “The greatest gifts bestowed by universities – learning how to learn, learning how to think, intellectual curiosity; the challenge and excitement of new ideas – are intangible and difficult to quantify.”And he went on: “Many employers simply want people who can think clearly, which is why a study of philosophy or history or classics is a lot more than an interesting diversion.”Many of the technical skills that are being taught in universities today will be defunct within a decade or so. What matters is that graduates have the framework which allows them to keep on learning.And that again is something that has to be kept front of mind when thinking about the role of universities.Let me try to summarise.The headlines that followed Browne and the Spending Review were mainly about the implications for fees, and you can understand why this should be the case. But by far the most important part of the proposals is the shift from the supply side to the demand side in determining the provision of teaching.As the major employer of graduates, business will have a very large interest in helping to shape the demand for teaching in higher education. This means that it will have to play an active role – much more so than in the past – in informing students about its likely future needs; in helping them to choose the right subjects to study; in working with universities to deliver courses that will provide attractive employment for graduates.At the same time, business will have to adapt to a changing regime for research funding. And it will have to understand the pressures that will change the mission of particular universities, and learn to work with them to their mutual advantage. The system will be much more diverse than in the past.Government will need to be wary of thinking it understands the future needs of business, whether as employers of graduates or as research collaborators. In particular, it should avoid an overly utilitarian approach – one which starts from the premise that only certain disciplines are to be valued in a knowledge economy.In the kind of fast changing world we are moving into, that view is certain to be wrong.And civil society as a whole needs to debate more fully than it has done so far the role that universities have to play in a social and cultural as well as an economic context. Universities deliver both public and private goods.

And when will that happen? The crunch vote in the House of Commons is due in about a month.

They have a vital role to play in the development of a dynamic economy. But of course they don‟t just exist to serve the interests of business.So these issues are not to be judged simply in the context of a fiscal crisis and a necessarily tough spending review. They have long-term consequences, with implications for every aspect of our society.

I feel I learnt a lot from this speech. But on Browne, as an employer, I suspect that Lambert has possibly skipped the single biggest impact of the reforms. Loaded with debt, graduates will surely be more demanding, both in terms of pay and in terms of the roles they will take on. Cheap degrees have been a hidden subsidy for employers. Now the subsidy is ending. Logically, employment costs should rise. I certainly wonder where I will find people who know about science, can write, want to be journalists and are affordable.

On the CSR, it's a bit light. No real discussion of the generality of real-terms research council cuts, or what this will mean if inflation (unsurprisingly) averages out significantly higher than the Treasury has forecast. No mention of the Technology Strategy Board and its impossible task now that the RDA hi-tech funding has gone. No mention of R&D tax credits, which are currently under the knife. No mention of the complaint from Nissan about vanishing government support for the deployment of advanced manufacturing. No discussion of the gap between the government's hi-tech growth rhetoric and these realities. Maybe all that would have been impolitic with such a new government.